Finance for Development

[vit]

I'm looking for oportunity to buy land, subdivide and build 2 townhouses with the intention to rent them out. Estimated implementation time is about 1 year (subdivision + construction). I've got a few question with regarding to it.

1) If I would buy the land with intention to build and rent - can I deduct interest (holding cost) during process of subdivision and construction?

2) Is any lender in Canberra which can capitalize interest on the construction loan? At least 50% of it? Or may be full 100%.

3) Do I need deposit for construction loan or it can be secured by new properties which I'm intended to build?

4) Is anybode of finance brokers on the forum in Canberra to have an appointment with to discuss my personal circumstances?

Thanks in advance,
Vit

 

[Rolf Latham]

Hiya Vit

Please see below

I'm looking for oportunity to buy land, subdivide and build 2 townhouses with the intention to rent them out. Estimated implementation time is about 1 year (subdivision + construction). I've got a few question with regarding to it.

1) If I would buy the land with intention to build and rent - can I deduct interest (holding cost) during process of subdivision and construction?

yes, I believe so. Steele Vs ATO was a case that established the deductability, though best check with an accountant ( im not one)

2) Is any lender in Canberra which can capitalize interest on the construction loan? At least 50% of it? Or may be full 100%.

How long is a piece of string............yes, depends on the overall equity position

3) Do I need deposit for construction loan or it can be secured by new properties which I'm intended to build?

If you own a substantial part of the land then possibly no further deposit is required. Some lenders will lend on Gross Realisable value, so if your project has lots of "profit" then even better

4) Is anybode of finance brokers on the forum in Canberra to have an appointment with to discuss my personal circumstances?

Ed Nixon's crowd at www.loansapproved.com.au should be able to help


ta
rolf
Thanks in advance,
Vit

 

[vit]

Hiya Vit

Please see below

Thanks, Rolf

I was going to capitalize for construction period (up to 6-9 month) and then refinance the whole thing (2 new TH) to another bank. I will contact that guy.

In the meantime here's my numbers which I wanted play with:

Land=500K
Stamp Duty=30K
Construction=2x250K
Interest=70-100K
Total=1.1M
Estimated value after completion 1.2-1.3M
Estimated rent=2x550 pw
Estimated depreciation = 12.5K (2.5% construction cost) + 10K (fittings) pa
Tax scale=40%

So it should be not very difficult to hold it after that....
About 300-400 pm
Does it sound reasonable?

 

[Player]

Hi vit,

the banks are likely to look at this as a very skinny deal. Total expenses of 1.1M. Your estimated value (needs to be current gross realisation, i.e: what would they sell for today?), doesn't leave enough profit in the deal.

Despite the fact that you are not selling them, personally I wouldn't attempt such a deal for the sake of (based on your figures) a min 9 % to max 18 % return. If you achieve the latter, the banks might lend you the money.

Your strategy of building new is sound for taking advantage of depreciation and on paper deductions should leave you out of pocket with small damage and possibly even positive CF with interest rate drops.

However, why go to the risk of doing this yourself in this market. Why not just buy two new boxes as a house and land package. Less risk. I'm not familiar with the market in Canberra and the availability of such product, so perhaps there is a reason you wish to build them yourself.

Be very certain with your numbers and err on the side of over-estimating the build costs. Base everything on today's numbers and values. We can't second guess what the market will do in a year. Also be mindful that just as quickly as interest rates have fallen, they may not go up as slowly as we've experienced over the last few years.

Do you own any other investment properties?

 

[vit]

Hi vit,

However, why go to the risk of doing this yourself in this market. Why not just buy two new boxes as a house and land package. Less risk. I'm not familiar with the market in Canberra and the availability of such product, so perhaps there is a reason you wish to build them yourself.

Be very certain with your numbers and err on the side of over-estimating the build costs. Base everything on today's numbers and values. We can't second guess what the market will do in a year. Also be mindful that just as quickly as interest rates have fallen, they may not go up as slowly as we've experienced over the last few years.

Do you own any other investment properties?

Hi Player,

Thanks for the response.
The numbers are not precise exactly - it's just to understand the picture for myself if this path worth wile to go. I need to investigate more in this direction so may be margin can go to the required 20%. Contigency is not included at this moment in the calculation same as rate increase.

Why do it myself? When you buy off the plan then eventually you pay all margins: land, developer, seller and other costs are included into your final purchase price. If you do any steps yourself then you eliminate some of these margins.

Canberra has the highest rent and salary in the country. At this moment average rent is just 25% of the average salary, while in other states it's about 35% which is called limit of rent affordability. At the same time city location rental market is very tough. Inspection can bring 20-25 people. And doesn't look like there some reasons to easy it up.

We have 2 IP in Melbourne which cost us about 1K after tax.
LVR is about 90% at this moment so no equity to withdraw.
I would would buy something not really negative (400K) then it should be 10+km from ctiy which is very long distance for Canberra (which means really small capital growth). I would would go to city location - price goes to 650-700K and it would be very negative.

 

[Player]

Hi vit,

rationale and strategy to put the developers margin and sundry add-on costs in your pocket (as equity in the boxes) is very sound and logical.

You will need to be more precise with the numbers. Look at a few sites (ensuring the town plan and zoning will allow you to do duplex/triplex) and run a quick feasibility. For me, it would need to give me 25 % or greater. Do mock number crunching just like paper trading shares.

Also as you're at 90 % with your Melb IP's, you may want to speak to a mortgage broker as Rolf has suggested above and see how likely your funding will be on various scenarios.

Unless you're clear on the return and likely funding, you may want to consider just buying the site with a rental box on it now and defer the development for better times, or even just waiting for more certainty in the market and funding for such deals. You will never run out of deals.

This is merely my opinion, and you should take your own servicibility and other financial considerations into account.

All the best with your journey.

 

[vit]

Hi vit,

You will need to be more precise with the numbers. Look at a few sites (ensuring the town plan and zoning will allow you to do duplex/triplex) and run a quick feasibility. For me, it would need to give me 25 % or greater. Do mock number crunching just like paper trading shares.

Also as you're at 90 % with your Melb IP's, you may want to speak to a mortgage broker as Rolf has suggested above and see how likely your funding will be on various scenarios.

Unless you're clear on the return and likely funding, you may want to consider just buying the site with a rental box on it now and defer the development for better times, or even just waiting for more certainty in the market and funding for such deals. You will never run out of deals.

This is merely my opinion, and you should take your own servicibility and other financial considerations into account.

All the best with your journey.

Thanks, Michael

I've done a lot of reading and know many theoretical investment ways and types of deals. However when you come from books to the real life by some reason it looks "a little bit different" and all your book theory just doesn't work. It could be various type of deal - reno, subdivision, development or just ready box for rent as you mentioned. But probably I first need to decide what particular type I want to find and then put some efforts into it.

Taking into considerations 90% LVR in Melb and 1K per month IP cost somebody might suggest me to wait for a couple of years until equity will be built up there and buy later. However I do believe that now (at least this year) it's a very good time to buy because it's buyer market at this moment. People still migrate to Australia and demand for dwellings is much more than availability. That's why I don't want wait. I'll talk to finance guys next week.

 

[sue78]

Estimated implementation time is about 1 year (subdivision + construction). I think you are underestimating the time frame. To build a house on a block of land takes at least 9mths and that's quick. Subdivision is a process that can take many mths on its own, even up to a year.

2) Is any lender in Canberra which can capitalize interest on the construction loan? At least 50% of it? Or may be full 100%.yes but you still need a minimum 20% deposit or more

3) Do I need deposit for construction loan or it can be secured by new properties which I'm intended to build?no it can't because the new properties don't get re-valued until it is completed. But you can use the expected rental income in your borrowings for the construction which should help a bit but you still need the 20% deposit

hope that helps. At 90% LVR, no equity...it's very risky from a bank's perspective. You only need to lose your job and that's it. Also, that's not a good deal.

I've never bothered with gross realisation value because the market is so volatile, especially with the economy now. My bank manager doesn't accept it.

 

[vit]

hope that helps. At 90% LVR, no equity...it's very risky from a bank's perspective. You only need to lose your job and that's it. Also, that's not a good deal.

I've never bothered with gross realisation value because the market is so volatile, especially with the economy now. My bank manager doesn't accept it.

Thanks, Sue

That makes sense. Especially I figured out that this block is not subdivadable. I can put dual occupancy but can't separate it to 2 titles. I believe that in this case price (and valuations) of these 2 units would be significantly lower then I expected because you can only sell them together if you need. It doesn't matter though if they will be rented out. But at some time I would need to sell them anyway.

 

[Propertygirl]

subdivide in Canberra

Hey there

Just a few thoughts...
Not sure if you are aware that as of March 31, 2009 there will be no more subdividing allowed in Canberra.

Even if you have bought a property to do this, you must have your approval and your slab down by this date for it to be accepted...oh, and it must be in a Core 10 area (within 200m - i think) of a shop...

Being late January, I don't like your chances of finding, negotiating, exchanging, settling, getting approval, and laying the slab in 8 weeks...

cheers
Propertygirl

 

[windsor]

Hey there

Just a few thoughts...
Not sure if you are aware that as of March 31, 2009 there will be no more subdividing allowed in Canberra.

Even if you have bought a property to do this, you must have your approval and your slab down by this date for it to be accepted...oh, and it must be in a Core 10 area (within 200m - i think) of a shop...

Being late January, I don't like your chances of finding, negotiating, exchanging, settling, getting approval, and laying the slab in 8 weeks...

cheers
Propertygirl

Any reasons why they are putting a stop to subdividing land.

 

[Mindmaster]

you may want to consider just buying the site with a rental box on it now and defer the development for better times, or even just waiting for more certainty in the market and funding for such deals. You will never run out of deals.

What do you mean by rental box?

Is that like a portable house you set up on the block to rent out or an expression for a cheap no frills low cost unit?

 

[Player]

What do you mean by rental box?

Is that like a portable house you set up on the block to rent out or an expression for a cheap no frills low cost unit?

Tongue in cheek............a box in this instance is merely a house/dwelling that can provide rental income, whilst one gains development approval at a later date.

It's about as unemotional as one can get about the source of the income. The box may range from a 5 BR McMansion to a 2 BR un-renovated (original) cottage.